DirecTV: Is Its Latin American Business a Significant Stock Driver?

Includes: CHTR, CMCSA, DISH, T
by: Trefis

DirecTV (NYSE:DTV) is the biggest satellite pay TV provider in the US. It competes with other satellite and cable providers like Dish Network (NASDAQ:DISH), Comcast (NASDAQ:CMCSA) and Time Warner Cable (TWC).

The company’s Latin America business is growing rapidly with Q4 2009 being one of the best quarters in terms of revenue and subscriber growth. Despite the high growth, we estimate that DirecTV’s Latin America business constitutes less than 6% of the $32 Trefis price estimate for DirecTV’s stock.

Growth of Latin America Business

DirecTV’s Latin America revenues in 2009 grew by more than 21% amounting to $2.9 billion. Latin America revenues have grown at an annualized rate of 38% since 2005.

The Latin America subscriber base grew by more than 18% in 2009 amounting to 4.6 million. Interestingly, the high subscriber growth did not come at expense of ARPU (average revenue per user) which itself registered a modest growth of about 3%.

DirecTV Latin America is Less than 6% of DirecTV’s Stock

We estimate that DirecTV’s Latin America business only constitutes 5.4% of the company’s estimated $30.5 billion value. This amounts to about $1.7 billion in value. The low value of this business segment can be primarily attributed to the negative free cash flows currently generated by the division and the low cash flows that we expect to be generated in the future. The cash flows of the Latin America business are impacted significantly by two factors:

1. High SG&A Expenses

DirecTV’s Latin America business has high SG&A expenses (as % of gross profits) of about 60%. This figure is about 11% higher than the SG&A expenses for DirecTV’s US business.

2. High Capital Expenditures

Since the Latin America business is in a rapid expansion phase, the division has significantly higher capital expenditure compared to DirecTV’s US business. The capital expenditure for this segment (as % of gross profits) was about 38% in 2009, more than twice that for DirecTV US.

We believe that high amount of SG&A expenses and capital expenditure for DirecTV Latin America will persist in the near future and as a result the Latin America business will take time to generate positive cash flows.

Do you think DirecTV can significantly reduce expenses for its Latin America division in the near future? You can modify forecasts above to see the impact on DirecTV’s stock price.

For additional analysis and forecasts, here is our complete model for DirecTV’s stock.

Disclosure: No positions